Over the past 30 years, rapid corporate consolidation changed the nature of buying and selling U.S. veterinary practices. In 2017, Brakke Consulting estimated that corporations owned over 10% of general companion animal practices and 40% to 50% of referral practices. By late 2021, about 1 in 4 companion animal practices was corporate-owned. Brakke estimated that consolidators snapped up 800 to 1,000 independent companion animal practices in 2021 alone. Veterinary Integration Solutions estimated a year ago that one of the largest consolidators, Community Vet Clinics/VIP Pet Care, owned about 3,700 hospitals or partner locations. At the same time, National Veterinary Associates and VCA each possessed over 1,000 practices.
As consolidators purchase more independent practices, the number of corporate buyers also grows. Some of the newest players include Veritas Veterinary Partners (founded in 2022) and Galaxy Vets (2021).
Amid the rise in veterinary practice consolidation, corporate buyers offered up to 18 to 20 times the companion animal practices’ annual earnings before interest, tax, depreciation and amortization (EBITDA). The multiples for some specialty or referral practices went even higher.
What Changed?
As interest rates rose and disposable incomes began to stagnate in 2022, corporate consolidators stopped offering 18 to 20 times EBITDA, and the consolidation rate started to slow. As a result, veterinary practice owners looking to sell to a consolidator find it more difficult today to receive what they view as a competitive offer.
Furthermore, practice owners who receive a competitive offer might struggle to consummate a sale. When selling a practice to a corporate consolidator, owners typically sign a nonbinding letter of intent (LOI), which sets forth the material business terms of the transaction. However, just because an owner signs an LOI does not mean either party is legally bound to the terms or each other. The only potentially “binding” aspect of nonbinding LOIs is that many provide for a period of exclusivity, which primarily operates for the benefit of the consolidator. That clause prevents the practice owner from seeking another buyer during the prescribed period.
Most nonbinding LOIs only result in a successful sale if the parties operate in good faith. Many practice sales are structured as a simultaneous sign-and-close, so typically, a legally binding agreement isn’t signed until the day of closing. That scenario means either party can step away from the transaction before the closing date and without legal consequences.
Over the past few years, the reality of signing a nonbinding LOI was not of much concern to buyers or sellers in the veterinary space, as about 95% of practice sales to corporate consolidators closed without an issue. Unfortunately, just as we see lower multiples and slower consolidation from late 2022 through 2023, we also witness more corporate buyers walk away from transactions.
The difference now is that consolidators are fleeing during the late stages rather than during the due diligence, and in some cases, after practice owners announce the sale and introduce the buyer to their teams. The consolidators aren’t obligated to explain the exit, and the practice owner is left with accountant and attorney fees and a confused staff.
What Can an Owner Do?
We recommend that practice owners negotiate a breakup fee to offset the risk associated with signing only a nonbinding LOI. Also called a reverse termination fee, it’s a payment made by the potential buyer if the transaction isn’t completed due to the buyer’s actions. The fee compensates the seller for the time and resources spent negotiating the deal. Such fees are commonplace in many other industries.
For example, an attorney can draft a breakup fee to be triggered by the buyer’s failure to:
- Secure financing for the transaction.
- Get shareholder or regulatory approval for the sale.
- Complete the transaction by a specific date.
A breakup fee is also possible if a buyer fails to provide a good-faith reason for abandoning the transaction or tries to terminate the sale after reaching a particular point in the negotiations.
As the consolidation landscape shifts, breakup fees will remain critical in protecting practice owners from unnecessary risk during a sale. Having a breakup fee in an LOI provides some assurance that sellers won’t be stuck with all the out-of-pocket expenses incurred in trusting that buyers will follow through on promised deals.
MERGERS AND ACQUISITIONS
Veterinary groups consume each other on occasion. Recent examples include VetCor’s takeover of People, Pets & Vets and Rarebreed Veterinary Partners’ purchase of Vet’s Best Friend.